The global market sell-off continues unabated and June proved a particularly bad month for international equity markets.

All major regional equity indices fell for the month with Asia showing the largest decline of 12.5% in dollar terms, June was definitely a period when the collective emerging market performance was worse than developed indices. The MSCI Emerging index collapsed 10% and the MSCI Developed Index fell 7.9%. This emerging underperformance is counter to the past five year trend of emerging markets outperforming developed markets and speaks to the level of portfolio outflows which has occurred in the emerging market space in 2008. The question that requires answering is when this situation is likely to turn for the better and general global indices enjoy a positive turnabout?

Unfortunately, a number of factors continue to weigh heavily on markets, some of which might not yet be factored into the ratings of some markets, particularly those in the emerging space. As far as developed markets are concerned, sub-prime write-downs remain an issue and until the market believes that the large investment banks have sufficient first and second tier capital to withstand market shocks, confidence levels will remain brittle. Rating agency downgrades on the large US and European Investment and Retail financial institutions continue and merger and acquisition activity between these institutions has yet to unfold. We believe that the true bottom of the cycle with respect to sub-prime and housing woes will be when predatory and well capitalized banks in the US and Europe decide to acquire those institutions with a long-term impeccable pedigree but which are facing capital constraints. This is likely to act as a major turning point for markets. This development should not be anticipated too quickly, the US financial system is very brittle in places and talk of government bail-outs for Freddie Mac and Fannie Mae are seriously worrying.

Whilst developed markets face a confidence of crisis due to undercapitalized financial institutions, overextended consumers, deflationary pressures on asset prices and inflationary pressures on consumer goods, emerging markets are arguably operating at past full employment and face the challenge of over-heatedness. Strong growth and highly accommodative monetary policies have conspired to create serious inflationary pressures in the emerging world.

Our real worry is that emerging central banks are way behind the curve with respect to interest rate policy and will struggle to pull inflationary pressures back in check. We believe that the likelihood for sustained rate increases across many emerging markets, but particularly in South East Asia, should not be discounted and concomitantly, this could well stem the performance of those markets even further than what has been the case of late.

Our thesis is thus a simple one, the economic backdrop is not equity friendly and it will take time before these various negative developments have completely run their course. This does however not imply that in certain spaces equity valuations are not already at reasonable levels and thus rallies are inevitable. It is just the sustainability of these rallies that we question! From heavily oversold levels we would be surprised if a third or fourth quarter equity rally does not occur.

As far as bonds are concerned, we continue to adopt a cautious approach here as most gilt markets have simply not responded to inflation as have equity prices. Property has been severely hammered but here too we are in no rush to chase this asset class as we feel that the difficulties of a slowdown in the global economic system will continue to weigh on property values. We are, however, very aware that listed property has already fallen heavily whereas bricks and mortar has lagged. This does offer some opportunities in situations where listed stocks have been hit too hard.

Finally on the currency front, our active calls against sterling and the dollar have been very rewarding, but we have now neutralized these, believing that after the moves that have been witnessed, it is irresponsible to be too aggressive on currency calls. We feel most comfortable with a more balanced currency portfolio.

Alphen's offshore funds have performed well and we are confident that our judicious approach will remain the correct one over time. Our asset allocation, currency calls and manager selection decisions have until now worked very well and we will continue to work tirelessly to maintain this trend.